Friday, May 31, 2013

TURKEY:
HSBC Amanah predicts Sukuk sales in the republic of Turkey to hit US$3
billion this year, as corporates and government-related entities exhibit
growing interest in tapping the country’s Islamic capital market. According
to data from Bloomberg, Sukuk sales in the country have reached US$1 billion
so far; with demand from Gulf investors for Turkish paper expected to further
drive yields down.

Just yesterday, it was announced that the government’s
initiative, the Istanbul International Financial Center (IIFC) which was
initially tabled in 2009 and is part of the government’s Ninth Development
Plan 2007-2013, will finally take off; funded by Shariah compliant
instruments. The sole investment bank mandated to raise money for the
project, Aktif Bank, confirmed that it will be issuing Sukuk and floating a
Shariah compliant IPO backed by real estate certificates based on the IIFC
project before June this year.

A representative of the bank told Islamic Finance news: “Investors will
have the opportunity to convert the certificates into IIFC property and to
invest in the very early stages of the project at a favorable purchase
price.”

Kuwait Finance House Turkey has also revealed plans to
debut a lira-denominated Sukuk worth TRY100 million (US$55.77 million), while
Bank Asya recently secured a syndicated Murabahah financing facility worth
US$380 million via 28 banks. The facility comprised of a US$230.5 million
tranche and a EUR115.3 million (US$151.47 million) segment.

The republic’s current ruling party, under the patronage of
prime minister Recep Tayyip Erdogan, is said to be actively growing the
country’s Islamic banking and finance market – or participation banking, as
it is called colloquially – to improve trade ties with the Middle East and to
encourage already eager Gulf investors into the country.

Thursday, May 30, 2013

RUSSIA:
The president of Tartarstan, Rustam Minnikhanov, has confirmed that the
republic is currently in the midst of finalizing its first Sukuk issuance.
This will also mark the first Sukuk to originate from the Russian federation
states. Minnikhanov added that authorities from the republic are also
discussing means of facilitating other Islamic financial instruments with
officials in Moscow — which is situated 800km east from the republic.

According to Linar Yakupov, the CEO of Tatarstan Investment
Development Agency, the issuance is expected to reach US$200 million.
However, other details such as the timing, maturity and currency of the issue
have not been confirmed, he told Reuters. The Sukuk will be backed by real
estate assets from the Kazan Smart City, where officials aim to develop as a
business and technology district.

In Volume 10 Issue 8 of Islamic Finance news, Vladislav Zabrodin
and Anna Leksashova from Capital Legal Services revealed that the government
of the Republic of Tatarstan has signed an MoU with Kuwait Finance House
(Malaysia) and AmanahRaya for the issuance of a sovereign Sukuk for the
republic, via an offshore entity either in Malaysia or Luxembourg. “This
would demonstrate the possibility of placing a Russian issuer on the Islamic
securities market to entice participants of the Russian market,” they wrote.

However, key challenges remain in the development of
Islamic finance in Russia; including its current riba-based banking system as
well as current legislations which prohibit the participation of a credit organization
in manufacturing, trading and insurance activities; limiting the use of
Murabahah, Istisnah and Salam contracts in the market.

On the flipside, the country’s abundant asset base
compensates for the current restrictions in issuing Islamic paper onshore,
with industry players suggesting the use of SPVs to issue Sukuk backed by
Russian assets, as the current law does not prohibit foreign entities from
owning local assets.

TBE Issuer – a wholly-owned
subsidiary of Tanjung Bin Energy Sdn Bhd (“TBE” or “the IPP”) (both companies
are collectively known as “the Group”) – is the turnkey contractor that will
develop, construct and finance TBE’s super-critical 1,000-MW coal-fired power
plant (“the Plant”) in Tanjung Bin, Johor. TBE Issuer’s financial commitments
in respect of the Sukuk will be supported by back-to-back payments from the
IPP. In this regard, we recognise the strong credit link between these entities
and view both companies in aggregate from a credit standpoint.

The construction of the Plant
was 26% complete as at end-February 2013, behind the scheduled 28% as a result
of minor setbacks. Nonetheless, given the available lead time and measures
taken to mitigate the effects of the delay, TBE Issuer should be able to make
up lost time. Given RAM’s cashflow assessment assumes cost overruns of 5.4% (as
opposed to the Project’s contingency sum of 2.5%), the Group’s credit profile
is expected to hold up. We further derive comfort from the long-standing
presence and track record of TBE’s sponsor – Malakoff Corporation Berhad –
which we believe will be strongly committed to seeing the Project through to
its completion, supported by its long-term ownership of its current IPPs.

The rating reflects TBE’s sturdy
project fundamentals, underscored by the favourable terms of its Power Purchase
Agreement (“PPA”) with Tenaga Nasional Berhad, the sole off-taker. At the same
time, the Group is envisaged to possess a strong debt-servicing aptitude, with
a minimum finance service coverage ratio on payment dates (with cash balances,
post-distribution) of 1.50 times. This is supported by its projected average
annual pre-financing cashflow of RM580 million and our assumption that the
Group will be able to continuously procure the required standby letter of
credit to fund TBE Issuer’s Finance Service Reserve Account. In arriving at the
projections, we have assumed that the Group will adhere to its financial
covenants throughout the tenure of the Sukuk on a forward-looking basis, rather
than only in the year of assessment.

The amortisation profile of TBE
Issuer’s Senior Facilities exposes the Group to potential changes in financial
guidelines, and market, interest-rate and credit-spread risks. In this regard,
the Single Counterparty Exposure Limit policy published by Bank Negara Malaysia
may heighten the Group’s refinancing risk although we note the project’s
cashflow for the remaining tenure of the PPA is sufficient to cover its total
outstanding debt at each point of refinancing.

As with other IPPs, the Group is
exposed to regulatory and single-project risks.

RAM Ratings has reaffirmed the
AA2 long-term rating of Tanjung Bin Power Sdn Bhd’s (“TBP” or “the Company”)
Sukuk Ijarah Programme of up to RM4.5 billion in nominal value (2012/2029)
(“sukuk”), with a stable outlook. TBP is an independent power producer (“IPP”)
that has been granted the right to construct, own and operate a 2,100-MW
coal-fired power plant (“the Plant”) in Tanjung Bin, Johor, for 25 years, under
a Power Purchase Agreement (“PPA”) with Tenaga Nasional Berhad (“TNB”) which
expires on 27 September 2031.

The rating reflects TBP’s sturdy
business profile, underscored by the favourable terms of its PPA with TNB. It
is also supported by the Company’s robust debt-coverage levels on the back of a
projected pre-financing cashflow of around RM1 billion annually between FY Dec
2013 and FY Dec 2019, which will taper to an average of around RM390 million up
to fiscal 2029 (when the tariff is reduced as per the terms of the PPA). This
is envisaged to translate into a finance service coverage ratio (with cash
balances, post-distribution, calculated on principal repayment dates) of at
least 1.65 times. In arriving at our projections, we have assumed that TBP will
adhere to its financial covenants throughout the tenure of the sukuk on a
forward-looking basis, as opposed to only during the year of assessment.

The Plant operated at maximum
capacity for most of fiscal 2012 as a result of TNB’s heavy reliance on coal-fired
plants amid the gas-curtailment situation. Owing to the Plant’s prolonged
operation at maximum capacity, TBP encountered increased unscheduled outages to
the extent of breaching the unscheduled outage limits (“UOL”) of 6% and 8% in
the PPA. Nevertheless, the Company suffered only a minor net reduction in
revenue of RM31.88 million (about 2.2% of potential revenue). Looking ahead,
RAM’s sensitised cashflow projections assume breaches of UOL for certain years,
amongst others, during the remaining tenure of the sukuk. As represented by
management, we would expect TBP to curtail distributions to its shareholders in
such a scenario in order to maintain its current debt-coverage level.

As with other IPPs, TBP remains
exposed to regulatory and single-project risks.

MARC has affirmed its
MARC-1ID/AAAID ratings on Sime Darby Berhad’s (Sime Darby) RM4.5 billion
Islamic Medium Term Notes Programme (IMTN Programme) and RM500 million Islamic
Commercial Papers (ICP) with a combined limit of RM4.5 billion (ICP/IMTN
Programme). The outlook of the ratings is stable. The rating of MARC-1ID on the
RM150 million Underwritten Murabahah Commercial Papers Facility has been
withdrawn upon the expiry and cancellation of the facility.

The affirmed ratings reflect the
group’s well-diversified business profile across businesses and geographies;
the steady operating track record of its core business segments of plantation,
industrial, motors and property; and strong financial flexibility. Sime Darby’s
performance, however, remains susceptible to commodity price volatility, in
particular crude palm oil (CPO) prices, and industry cyclicality that could be
further compounded by the challenging economic conditions in some of the major
markets in which the group operates.

Sime Darby’s plantation
division, which is one of the group’s six main business divisions, has remained
the largest contributor to its operating profit, generating 50% of the total
for the half-year ended December 31, 2012 (1HFY2013) (1HFY2012: 59%). The
plantation division has over 519,000 ha of cultivated oil palm acreage and is
one of the world’s largest producers of CPO, contributing 6% of the global
output annually. With 61% of the total cultivated areas in the prime maturity
range, MARC opines that the division’s performance will be underpinned by
steady fresh fruit bunch production. Notwithstanding this, the weak CPO price
trend will continue to weigh on the division’s near-term performance. For
1HFY2013, the lower average CPO price of RM2,432/MT (FY2012: RM2,925/MT;
1HFY2012: RM2,872/MT) was largely responsible for the sharp decline in
operating profit to RM1,187 million (1HFY2012: RM1,849 million). MARC believes
that recovery in the near-term prospects for the palm oil segment would be
driven by the pace of palm oil inventory reduction and improvement in global
economic conditions.

MARC observes that the group’s
industrial and motors division have somewhat compensated for the weaker
performance of the plantation division. For 1HFY2013, the industrial and motors
divisions recorded operating profit of RM659 million (1HFY2012: RM616 million)
and RM320 million (1HFY2012: RM304 million) respectively. However, going
forward, the performance of the motors division will be governed by the intense
competition in the Chinese automotive market, among other factors, while the
industrial division will depend on the rebound in mining activities in the
Australasia region. MARC notes the weakening performance of the property
division, which recorded a lower operating profit of RM110 million in 1HFY2013
(1HFY2012: RM179 million), is due to fewer launches undertaken by the division
amid the moderating trend in the domestic property market. The division’s major
overseas project, the Battersea power station redevelopment in London, UK, has
since seen strong take-up rates for the first phase launched in January 2013.
Nonetheless, the RM40 billion Battersea project, in which Sime Darby has a 40% stake,
could expose the division to project execution risk, which is mitigated to a
certain extent by the longstanding experience of the key project sponsors.
Meanwhile, the performance of the energy and utilities division, which
registered an operating profit of RM127 million in 1HFY2013, recorded lower
throughput at its China ports and higher overhead costs.

On a consolidated basis, group
revenue grew by 3.2% to RM23.2 billion for 1HFY2013 from the previous
corresponding period, while pre-tax profit declined sharply by 25.5% to RM2.3
billion between the same periods. For FY2012, the group’s free cash flow (FCF)
was negative RM773 million (FY2011: surplus of RM1.4 billion). Group borrowings
have continued to increase to fund its acquisitions and capital expenditure
spending; total borrowings stood at RM11.5 billion as at December 31, 2012
(end-June 2012: RM9.8 billion). As a result, the group debt-to-equity (DE)
ratio rose to 0.43 times from 0.36 times. Assuming full drawdown on the US$1.5
billion multi-currency sukuk programme which was set up in January 2013, group
DE would increase to 0.60 times.

At Sime Darby’s holding company
level, revenue consisted solely of dividends from its subsidiaries, of which
the plantation division remains the main contributor, accounting for 60% of
RM2.7 billion dividends upstreamed in FY2012 (FY2011: RM2.0 billion). While the
prevailing difficult operating environment of several of its divisions could
hamper the quantum of dividend flow from subsidiaries in the near term, MARC
expects the plantation division to continue to be the major dividend
contributor. Borrowings at the holding company level increased to RM3.4 billion
as at end-FY2012 (FY2011: RM3.2 billion), of which 79% or RM2.7 billion
consisted of borrowings under the rated facility, but the DE ratio remained low
at 0.26 times due to the 6% increase in shareholders’ funds. MARC also
considers the liquidity and financial flexibility at the company level to be
strong as reflected by cash and cash equivalents of RM315 million and the
unutilised amount under the rated ICP/IMTN programme of RM2.0 billion against
short-term borrowings of RM1.7 billion as at June 30, 2012.

The stable outlook reflects
MARC’s expectations that Sime Darby’s credit metrics will remain commensurate
with its current ratings.